Appeals Court Rules That Cap-and-Trade Is Not a Tax

Yesterday a California state appeals court held that the state’s cap-and-trade system is not a tax.

What this means is that the legislation that originally called for the creation of cap-and-trade, A.B. 32, did not need a 2/3 vote when it passed in 2006. It didn’t get it at the time, garnering just a bit more than half of the legislators’ votes.

The Global Warming Solutions Act, as it is called, didn’t call specifically for cap-and-trade per se, but gave the Air Resources Board (ARB) the authority to create a “market-based mechanism” to control greenhouse gas emissions. The cap-and-trade system was what the ARB settled on after consultation with the public, including industry.

Yesterday’s court decision also means that state legislators can turn their attention and energy from trying to pass new legislation authorizing cap-and-trade with a new 2/3 vote, which Governor Brown had called for in order to settle the issue once and for all.

At issue in the suit was whether the quarterly auctions, through which companies bid for, buy, and sell credits (the “trade”) allowing them to emit greenhouse gases up to a certain level (the “cap”), constituted an illegal tax.

The plaintiffs in the suit, the California Chamber of Commerce, could still appeal it to the State Supreme Court, but this court’s ruling was clear:

. . . the purchase of allowances is a voluntary decision driven by business judgments as to whether it is more beneficial to the company to make the purchase than to reduce emissions. Reducing emissions reduces air pollution, and no entity has a vested right to pollute. (emphasis added)

In addition, said the court, the fact that the credits, once purchased, could be traded, bought, and sold among companies means that the cap-and-trade system involves both voluntary participation and the purchase of a commodity with value—neither of which are “the hallmarks of a tax.”

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